Another win for listed companies
Judgment has been delivered in the third shareholder class action to run to judgment in Australia, with Justice Jagot of the Federal Court rejecting the applicant's claim in its entirety in Bonham as Trustee for the Aucham Super Fund v Iluka Resources Ltd  FCA 71.
In another win for defendant companies, the Court found that Iluka Resources (Iluka):
- did not engage in misleading or deceptive conduct; and
- did not breach its obligations under Australia's continuous disclosure regime.
Justice Jagot rejected allegations that Iluka was unreasonably optimistic as to its sales forecasts and that it was determined to ignore the dire state of the market for as long as possible.
Consistent with the decision in Crowley v Worley Limited  FCA 1522,1 this case reaffirms that, without a clear basis for doing so, courts remain reticent to second guess the carefully considered and informed decisions that constitute the reasonable basis for forward-looking statements made to the market.
- This is now the third shareholder class action which has resulted in no award of damages for shareholder class members, highlighting the significant risk that plaintiff lawyers and litigation funders take in pursuing such claims to trial, with no home run guaranteed. That said, only a small proportion of shareholder class actions have gone to trial.
- Whether or not a forward-looking representation is made on reasonable grounds is a question of substance, not merely process. The Court upheld existing authority that a person will be considered to have had reasonable grounds for making a representation with respect to a future matter if there are facts which are sufficient to induce that state of mind in a reasonable person.
- Disclaimers and qualifications have an important role to play in forecasts given to the market, and were given significant weight by the Court. Iluka's announcements did not include boilerplate disclaimers 'reasonably able to be ignored',2 rather they prominently outlined the specific circumstances applicable at the time at which the announcements were made, contextualising why Iluka's estimates were inherently uncertain and were expressly described by Iluka in its announcements as 'not a predictor of future performance' – the disclaimer's represented Iluka’s genuine views about uncertain economic conditions.
- The Court recognised that Iluka personnel were highly experienced and diligent, not unduly optimistic, and that this is not inconsistent with aiming for 'stretch' targets.
- Although obiter, Jagot J commented that if an officer possesses information from which the officer ought reasonably to have arrived at a particular conclusion, the entity has become aware of the information represented by that conclusion. In other words, in Jagot J's view, the meaning of 'aware' in ASX Listing Rules 19.12 is not confined to opinions actually held and a company will be found to be aware of information represented by an opinion (or conclusion) if they ought reasonably to have formed a conclusion from information in its possession. This remains an unsettled area of law.3
- It is worth noting this case involved consideration of section 674 of the Corporations Act 2001 (Cth) (Corporations Act) in effect prior to the introduction of the Treasury Laws Amendment (2021 Measures No. 1) Act 2021. As this amending law provides that entities will only be liable for civil penalty proceedings in respect of their continuous disclosure obligations if they fail to update the market with information which they knew was price sensitive, or were reckless or negligent with respect to whether that information was price sensitive,4 there is a question as to whether a case such as this would be brought at all or, if brought, whether it would be incrementally harder to prove having regard to the resetting of the regulatory position.
- While the facts are centred on continuous disclosure, there is no reason that many of the principles examined by Jagot J would not be equally applicable to other settings, principally, forecasts made under a prospectus for an IPO. Section 728(2) of the Corporations Act, as it relates specifically to prospectuses, prescribes that a person is taken to make a misleading statement about a future matter if they do not have reasonable grounds for making the statement. Justice Jagot's observations in relation to an entity's internal processes, the need for close consideration of the substance of the guidance, and the application of disclaimers, will be welcomed by boards and senior management preparing an entity for a listing.
Iluka is a miner and global supplier of mineral sands products, including zircon and titanium dioxide products.
On 9 July 2012, Iluka's share price fell by about 25% following its release to the market of revised sales guidance. The revised sales guidance followed announcements on 23 February 2012, 12 April 2012 and 8 May 2012, which had forecasted increased sales volumes for zircon, rutile and synthetic rutile (titanium dioxide products).
The applicant alleged that Iluka:
- made false or misleading statements in contravention of section 1041E of the Corporations Act;
- engaged in misleading or deceptive conduct in contravention of section 12DA of the Australian Securities and Investments Commission Act 2001 (Cth) and/or section 18 of the Australian Consumer Law (being Schedule 2 of the Competition and Consumer Act 2010 (Cth)); and
- contravened its continuous disclosure obligations pursuant to section 674 of the Corporations Act and ASX Listing Rule 3.1.
The continuous disclosure claim alleged that Iluka was aware of information which rendered its sales (volume) forecasts unreasonable, and failed to disclose this material information to the market.
The misleading or deceptive conduct claim was put on the grounds that Iluka:
- expressly represented expected sales volumes in its April announcement and again in its May announcement; and
- impliedly represented that it had reasonable grounds for those express representations.
In dismissing each of the applicant's claims and holding that Iluka did not contravene its continuous disclosure obligations and did not engage in misleading or deceptive conduct, the Court found that:
- Iluka did not make the alleged representation that it 'expected to achieve' certain sales volumes as pleaded by the applicant.
- Having regard to the prominent and specific qualifications and disclaimers contained in Iluka's announcements, the 'dominant message' of the announcements was not that Iluka reasonably 'expected' particular sales forecasts to be achieved, but rather that reliable predictions were difficult to make due to the difficulty in forecasting global economic conditions and that it was providing the best guidance it could for the benefit of sophisticated professional investors.
- The Court also found that the absence of pricing forecasts from the announcement, and thus the absence of any representation as to profitability, reinforced the fact that the announcement was pitched at sophisticated investors to assist with modelling only. In future cases we can expect plaintiff lawyers to argue that profit guidance has a different character and is intended for a wider audience.
- Iluka had reasonable grounds for its forecasts.
- Determining whether a company has reasonable grounds for a forward-looking statement is a question of substance, and a company's processes will assist in establishing reasonableness but will not be determinative. Even a robust process may yield unreasonable outcomes.
- The Court found that the relevant Iluka personnel were highly experienced in the markets in which Iluka operated, and were careful, diligent, and continuously exerted themselves to ensure that the information Iluka gave to the market was accurate and timely.
- The fact that, with hindsight, Iluka was wrong about the timing or the fact of a rebound in demand in the second half of 2012 did not establish that it lacked reasonable grounds for the alleged representations, and hindsight cannot be used to establish a lack of reasonable grounds.
- Because Iluka was found to have had reasonable grounds for its representations as to expected sales volumes in its April and May announcements, Iluka could not have been aware of the alleged contrary information alleged to have been subject to an obligation of disclosure. For this reason, the continuous disclosure allegations failed.
The Court also noted that Iluka:
- acted reasonably in forecasting so-called 'stretch' targets beyond what was easily achieved and it was not unreasonable for Iluka to do so;
- appreciated the risk posed by substitution (ie replacing Iluka's products with cheaper alternatives) and thrifting (ie using less of the minerals in the finished product) practices that were emerging in the market;
- personnel communicated frankly regarding Iluka's forecasts and, within Iluka, personnel did not demonstrate any reluctance to deliver negative news to senior management; and
- was reasonably sceptical about forecasting information given to it by customers given that those customers were incentivised to undersell the level of demand for Iluka products in order to persuade Iluka to lower its prices.
In assessing how the Board of Directors managed its approach to its continuous disclosure obligations, Jagot J observed that the Board had a detailed understanding of the relevant markets and market dynamics and that consideration of its continuous disclosure obligations was a part of every Board meeting. Her Honour also found that the Board members recognised the importance of the disclaimers used in Iluka's announcements and were careful to review any guidance on a line by line basis prior to approving and releasing announcements to the market. This reinforces the importance of strong corporate governance practices, in particular the need to consider such disclaimers and the matters that they call out, together with diligent contemporaneous record keeping evidencing such practices, which will assist in the defence of a class action should a company become the target of such claims.
Although ultimately unnecessary to determine, Jagot J rejected Iluka's submission that the continuous disclosure obligations 'only require an opinion to be disclosed if the opinion is actually held' by relevant persons. Justice Jagot commented in obiter that if an officer possesses information from which the officer ought reasonably to have arrived at a particular conclusion, the entity has become 'aware' of the information represented by that conclusion, for the purpose of ASX Listing Rules 19.12. Justice Jagot's comments were obiter and will not be binding on other judges, but this remains an unsettled area of law and potential development to monitor following not dissimilar comments in recent judgments of the Federal Court (see the decision of Lee J in Australian Securities and Investments Commission v GetSwift Limited (Liability Hearing)  FCA 1384 at -).
Having regard to her findings on liability, Jagot J made only brief observations in relation to causation and loss, most relevantly:
- the named applicant would not have succeeded in establishing causation or loss because he did not actually rely on Iluka's disclosures; and
- the applicant's evidence seeking to establish market-based causation was also flawed because it failed to have sufficient regard to significant short-selling of Iluka. This short-selling indicated that the market was able to form a less optimistic view about the impact of macro-economic conditions on Iluka's sales volumes. The fact that short sellers formed a different view to Iluka did not make Iluka's view unreasonable. Rather, it tended to indicate that the market did not need Iluka's internal information to form that view. The divergent expectations within the market also made the task of an events study expert in seeking to establish what the market's expectations were, as the first step in seeking to establish that the share price was inflated, 'fraught with difficulty'.
The first of those points is of some interest in relation to the status of market-based causation. In TPT Patrol Pty Ltd as trustee for Amies Superannuation Fund v Myer Holdings Limited  FCA 1747 Beach J gave a detailed analysis of the basis for market-based causation in the decision, rejecting a variety of arguments made against it as a theory of loss causation. He also pondered, but ultimately did not need to decide, how to deal with potential problems that could be caused by market-based causation; that it had the effect in practice of reversing the onus of proof in relation to individualised issues of loss; and, in particular, that it would lead to investors being compensated even if they knew the truth or did not care about the truth. Justice Beach suggested that, if it was established that the share price was inflated and that an investor acquired shares while the price was inflated and held them at the time of a corrective disclosure: any loss may prima facie be recoverable under the market-based causation theory. But on one view an investor may still need to give evidence that but for the contravention he would not have purchased the shares or not at the price he paid.5
Justice Jagot's finding that, on the facts, the alleged contraventions would not have affected the applicant's decision-making, puts some more flesh on the issues identified by Beach J and tends to emphasise that market-based causation will not necessarily go the whole distance for class action promoters in proving causation of loss.
Justice Gleeson's decision was appealed and the decision of the Full Court of the Federal Court of Australia is currently reserved.
Bonham as Trustee for the Aucham Super Fund v Iluka Resources Ltd  FCA 71 at .
A similar view was recently expressed by Lee J in Australian Securities and Investments Commission v GetSwift Limited (Liability Hearing)  FCA 1384 at -.
TPT Patrol Pty Ltd as trustee for Amies Superannuation Fund v Myer Holdings Limited  FCA 1747 at .